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[2001] VSC 39
Supreme Court of Victoria
2001-02-28
Warren J
Original judgment source is linked above.
TRUSTS - trading trust - trustee's indemnity from trust assets - subrogation to creditor of trustee's indemnity. PROCEDURE - application to withdraw admission in pleadings. CORPORATIONS - leave to proceed against company in liquidation - Corporations Law, s.471B.
"Notwithstanding any other provision in the Trust Deed, the Trustee shall be entitled to be indemnified out of the Trust Fund for all liabilities which the Trustee may incur or to which the Trustee may be subject and if the Trustee deems fit make any contract hereby authorised in such manner that the same and any liability thereunder shall be enforceable against the Trust Fund and all persons or corporations extending credit to, contracting with or having any claims against the Trustee in respect of the Trust Fund may look to the Trust Fund for the payment of any such contract or claim or for the payment of any debt, damage, judgment or decree or for any money that may otherwise become due or payable by the Trustee PROVIDED ALWAYS that the Trustee shall not have the power or authority to enter into a contract which will bind or affect a Beneficiary personally nor call upon a Beneficiary for any payment whatsoever."
(1) That Merlaw was originally the trustee of the Prudent Trust.
(2) That Merlaw held the Kew property as nominee of Mr Nolan in his capacity as trustee of the Prudent Trust.
(3) That Merlaw held the Kew property as trustee of the Prudent Trust.
(4) That the Kew property was "at all times" an asset of the Prudent Trust.
Whether the Jolimont Property was an Asset of the Prudent Trust
The Entitlement of Merlaw to an Indemnity from the Trust
"With regard to the point that has been argued, I understand the doctrine to be this, that where a trustee is authorized by a testator, or by a settlor - for it makes no difference - to carry on a business with certain funds which he gives to the trustee for that purpose, the creditor who trusts the executor has a right to say, 'I had the personal liability of the man I trusted, and I have also a right to be put in his place against the assets; that is, I have a right to the benefit of indemnity or lien which he has against the assets devoted to the purposes of the trade.' The first right is his general right by contract, because he trusted the trustee or executor: he has a personal right to sue him and to get judgment and make him a bankrupt. The second right is a mere corollary to those numerous cases in Equity in which persons are allowed to follow trust assets. The trust assets having been devoted to carrying on the trade, it would not be right that the cestui que trust should get the benefit of the trade without paying the liabilities; therefore the Court says to him, You shall not set up a trustee who may be a man of straw, and make him a bankrupt to avoid the responsibility of the assets for carrying on the trade: the Court puts the creditor, so to speak, as I understand it, in the place of the trustees."
"It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: Vacuum Oil Co Pty Ltd v Wilstshire. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets: Vacuum Oil Co Pty Ltd v Wiltshire. The charge is not capable of differential application to certain only of such assets. It applies to the whole range of trust assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorized to use for the purposes of carrying on the business: Dowse v Gorton. In such a case there are then two classes of persons having a beneficial interest in the trust assets: first, the cestuis que trust, those for whose benefit the business was being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trust are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied: Vacuum Oil Co Pty Ltd v Wiltshire. The creditors of the trustee have limited rights with respect to the trust assets. The assets may not be taken in execution (Savage v Union Bank of Australia Ltd). In re Morgan; Pillgrem v Pillgrem but in the event of the trustee's bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee: Vacuum Oil Co Pty Ltd v Wiltshire; Ex parte Garland. These principles lead naturally to the conclusion that the beneficial interests which, by subrogation, the creditors whose claims arise from the carrying on of the business have in the assets held by a bankrupt trustee form part of the property of the bankrupt divisible amongst his creditors: Savage v Union".
"Property which is an asset of a trading estate carried on by a trustee is properly described as trust property: Dowse v Gorton; Jennings v Mather. However, as we have already indicated, that does not mean that the cestuis que trust are necessarily entitled to call for the delivery of the property. If the trustee has incurred liabilities in the performance of the trust then he is entitled to be indemnified against those liabilities out of the trust property and for that purpose he is entitled to retain possession of the property as against the beneficiaries. The trustee's interest in the trust property amounts to a proprietary interest, and is sufficient to render the bald description of the property as 'trust property' inadequate. It is no longer property held solely in the interests of the beneficiaries of the trust and the trustee's interest in that property will pass to the trustee in bankruptcy for the benefit of the creditors of the trust trading operation should the trustee become bankrupt. The fact that the trust property itself cannot be taken in execution by the creditors of the trustee is not to the point. Those creditors are nevertheless subrogated to the rights of the trustee in relation to that property, and in the event of the trustee becoming bankrupt, it is those rights which are to be realized in their favour."
"We take the view that the passing to the trustee in bankruptcy of the trustee's beneficial interest in the trust estate, even if that is all that passes, is sufficient to attract the operation of s.122 of the Bankruptcy Act. Once it is recognized that a trustee may enjoy a right of indemnity over the trust property in respect of liabilities incurred by him in the administration of the trust, it follows that the creditors of a trust business may have resort to the assets of the trust to the extent of the liabilities incurred by the trustee. Section 122 is apt in the case of an individual trading trustee to render void as against the trustee in bankruptcy a payment out of the trust property in circumstances which have the effect of giving the payee a preference, priority or advantage over other creditors. It is not necessary for us to decide in the present case whether money paid by way of preference would normally have to be repaid to the trustee in bankruptcy or to the bankrupt trustee. In the case of the winding up of a company the legal title to all company property including trust property, remains in the company. The liquidator of a company takes the position of the directors and, in the absence of a court order under s.233(2) of the Companies Act, acquires no title to company property."
"There is no suggestion in the case that there were any creditors other than creditors of the trust business, and there was certainly no suggestion that the 'proprietary interest' which the trustee had in the trust fund was property divisible among the creditors other than those who were subrogated to the trustee's right of indemnity. In other words, the case is not authority for the proposition that, where a trustee company carries on business with a trust fund and incurs liabilities and then is wound up, the whole of the trust fund is property divisible amongst all the company's creditors, whether trust creditors or not. The right of indemnity arises only because the trustee is liable to creditors whose debts arose because of its activities as trustee of the fund. If there is no right of indemnity, there is no 'proprietary interest'. For example, if a company, having various powers including a power to act as trustee, carries on business on its own account as well as in its capacity as a trustee, it would have no right of indemnity out of the assets of the trust for liabilities it incurred in the business it carried on on its own account, and the creditors of that business would have no right to look tot he trust assets for payment of their debts by subrogation to the company's rights."
" ... that the trustee's right to indemnity gave him a proprietary interest which on his bankruptcy passed to his trustee in bankruptcy or where the trustee was a company came under the control of the liquidator. No limitation was expressed upon the purposes for which the trustee in bankruptcy or the liquidator might apply the proceeds of the right."
"In a case like the present therefore the proceeds of the trustee's lien are available for division among the bankrupt's creditors generally, not only among creditors of the trust business, and in the case of a company in liquidation are subject to the control of the liquidator under s.292. Where, however, the trustee's indemnity derives from a party who is concerned with the application of the money which he pays, the situation may well be otherwise: see Liverpool Mortgage Insurance Company's Case, [1914] 2 Ch. 617, per Buckley, L.J., at p.633. Creditors of the trust business may be subrogated to the trustee's right of indemnity but they cannot, by subrogation, obtain any greater right than that possessed by the trustee, and when the trustee's estate is separated from the trust estate by bankruptcy they rank with the general creditors of the bankrupt. They can have no better right than the bankrupt trustee: cf. Re Johnson; Shearman v. Johnson (1880), 15 Ch. D. 548, at pp.552 and 555."
"As the company's obligation as trustee to pay the debts incurred in carrying out the trust cannot be performed unless the liquidation proceeds, it seems to me to be reasonable to regard the expenses mentioned above as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee's right of indemnity."
"In any event, the decision in Re Enhill Pty Ltd appears to us to be discretely founded on the principle that a trustee's right of indemnity is itself based on the right that a trustee has to 'exonerate his personal estate' (at p.564) out of the trust assets. We do not find it necessary to comment further upon the reasons in Re Enhill, which have been said to 'look distinctly fragile': Finn, Essays in Equity, (1977), p.250. Moreover, we are not here concerned with a trustee's right of indemnity against trust assets but rather the relevant right of indemnity, being simply a contractual right. In our opinion it constitutes property of the company in the hands of and under the control of the liquidator. It would be 'property' of the company of which it could dispose, within the meaning of the section. That is not the same thing as to say that the company does dispose of it, if after the contract giving rise to the indemnity, the debt to which the right of indemnity relates is satisfied by the indemnifier."
"That BPTC's right over against its own directors is property available or creditors generally in the winding up of BPTC is, I think, consistent with the decision of this court in Re Enhill Pty Ltd [1983] VicRp 52; [1983] 1 VR 561, where the trustee's right of indemnity out of the assets of the trust was considered in the winding up of the trustee. It had been held in Re Byrne Australia Pty Ltd [1981] 1 NSWLR 394 that the proceeds of a trustee's right of indemnity out of the assets could be used in the winding up only for the payment of the creditors of the trust: see also Re Byrne Australia Pty Ltd (No. 2) [1981] 2 NSWLR 364. This court declined to follow those two decisions of Needham J., holding instead that the trustee's right of indemnity out of the trust assets was property available to the liquidator for division among the trustee's creditors generally in the winding up of the trustee. In substance, this court was of the view that the special considerations affecting a trustee's right of indemnity out of the assets were not such as to confine the availability of that right, considered as an item of property in the winding up, to creditors of the trust. Of course, in the present case there are no such special considerations, where BPTC, if it is to be considered as having some right of 'indemnity' from its directors, is relying upon duties which those directors owed generally to their company; nor is that 'indemnity' to come out of the assets of the trust. In those circumstances, the difference of opinion between the Supreme Court of New South Wales and this court on the question of the trustee's right of indemnity out of trust assets when the trustee is being wound up (as to which see also Re Suco Gold Pty Ltd (In liq) (1983) 33 SASR 99; Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (Qld) [1984] 1 Qd R 576 and Ramsay v national Australia Bank Ltd [1989] VicRp 7; [1989] VR 59) is not a difference of opinion which is at all relevant."
(1) Mr Nolan as trustee agreed to pay the sum of $150,000 in instalments to the liquidator to satisfy the claim of the liquidator for indemnity against the trustee as trustee of the Prudent Trust. (clause 3.1)
(2) A recital of the fact of the present proceeding (clause 17).
(3) A requirement of the appointment of an independent accountant to prepare a report for the liquidator for the purpose of seeking court approval of the settlement.
(4) An acknowledgment by the liquidator and Mr Nolan that settlement did not in any way seek to detract or alter the rights, if any, that Mr Collie as plaintiff asserts in the present proceeding (clause 21).
"6. Merlaw Nominees - (a) Has not paid or satisfied the Judgment, in part or at all. (b) Is and remains entitled to indemnity out of and to exoneration from the trust estate of the Prudent Trust ('the trust estate') in respect of that liability and the Judgment. (c) Has to that extent an equitable charge or interest in the trust estate. (d) Has been unable or unwilling, by reason of its own impecuniosity or otherwise, to take such proceedings for indemnity and exoneration. (e) After the institution of the Proceeding, and upon ceasing to be trustee, transferred or purported to transfer the trust estate to Nolan."
"An admission in a pleading is a serious step for a party to take. It means that proof is no longer required or permitted of the fact admitted as the fact is no longer in controversy between the parties: see Pioneer Plastic Containers Ltd v Commissioners of Customs and Excise [1967] Ch. 597. Further, admissions by pleading entitle the court to make orders in favour of a party to which that party is entitled on those admissions. See r.35.04. As a matter of principle a party who has made an admission in a pleading should not be entitled to withdraw that admission without good cause, for example, that the admission was made in error by the party who prepared or gave the instructions for the preparation of the pleading, or as the consequence of a misapprehension by counsel or solicitor concerning the client's instructions."
" ... it is for the plaintiffs to plead the facts in their statement of claim and if, having pleaded them in the statement of claim, the defendants admit all those facts, then there is no issue between the parties on that part of the case which is concerned with matters of fact. Where there is no issue to be decided there is no proper purpose to be served by admitting any evidence ... ".
"But that evidence is accepted by the court in a case where there are issues of fact between the parties is no reason for holding that evidence should be admitted where all the facts alleged by the plaintiff are admitted by the defendant".
3. The challenge to the standing of the plaintiff to bring the present proceeding
Collie
Merlaw Nominees Pty Ltd [2001] VSC 39
(1945) 72 CLR 319
(1992) 8 WAR 42
(1979) 144 CLR 360
(1998) 45 NSWLR 639
(1983) 33 SASR 99
(1992) 26 NSWLR 738
(1994) 13 WAR 323
(1992) 112 FLR 119